20140415-美银美林-Share_price_rose_for_the_wrong_reasons__reiterate_U_P_12页_731kb

Summary of Document: Aluminum Corp. of China (Chalco) - Share Price Analysis

Core Content

This document is a stock analysis report issued by Bank of America Merrill Lynch on April 15, 2014, focusing on Aluminum Corp. of China (Chalco). It evaluates the reasons behind the recent rise in Chalco's share price and reiterates the Underperform rating due to weak fundamentals. The report also includes financial estimates, key metrics, and a detailed analysis of the A-H share price spread and domestic aluminum price dynamics.

Main Points

1. Share Price Rise for the Wrong Reasons

• Chalco's share price rose by 14% YTD, driven by:
  • A 5.3% increase in the LME aluminum price.
  • A 38% discount in H-share price compared to A-share price.
• However, these factors are not indicative of strong fundamentals:
  • Domestic aluminum prices fell by 8.3% YTD, which is more relevant to Chalco.
  • The new Hong Kong-Shanghai "Through train" does not create a direct arbitrage mechanism.
  • Positive sentiment has already been factored into the price.

2. Domestic Aluminum Price Will Likely Remain Weaker

• Domestic aluminum prices are expected to stay weaker than overseas prices due to:
  • High export taxes (17% VAT, 20% export tax) and import taxes in foreign countries.
  • Over 4 million tons of new capacity planned in China, which will increase supply and suppress prices.
• The low-cost new capacities (especially in Xinjiang, Gansu, Inner Mongolia, and Qinghai) will likely replace existing high-cost capacities once prices recover.

3. A-H Share Price Spread Has Been Priced In

• The H-share price surged by 10% on April 10 due to the "Through train" mechanism.
• The spread is not expected to drive further price increases, as:
  • Arbitrage is not straightforward.
  • The investment thesis is well-known, and the market has already priced it in.
• Top A-share mutual funds hold only 1.2% of Chalco's total floating shares, with most being ETF funds, indicating limited potential for incremental investment.

4. Reiterate Underperform Rating

• The Underperform rating is reiterated because:
  • The recent price rally is not supported by fundamentals.
  • The company is expected to be loss-making in 2014 and 2015.
  • The price-to-book (P/B) ratio is used for valuation, with a 0.55x multiple (below historical average).
• Downside risks include:
  • Abrupt changes in aluminum prices.
  • Uncertainty around capacity controls.
  • Decline in raw material prices.
  • Uncertainty in overseas expansion.
• Upside risks include:
  • Stronger-than-expected economic recovery.
  • Better-than-expected production discipline.

Key Financial Information

*For full definitions of iQmethodSM measures, see page 9.

Stock Data

• Current Price (HK$): 3.07
• Price Objective: HK$1.90
• 52-Week Range: HK$2.20 - HK$3.32
• Market Value (mn): HK$41,520
• Average Daily Volume: 16,257,970
• Volatility Risk: HIGH
• Investment Opinion: C-3-9
• ROE (2014E): -16.2%
• Net Debt to Equity (Dec 2013A): 199.7%
• Est. 5-Yr EPS / DPS Growth: 29.4% / NA
• Free Float: 0.6%

Company Description

• Chalco is the largest producer of alumina and primary aluminum in China.
• Its core business includes:
  • Bauxite mining.
  • Alumina refining.
  • Primary aluminum smelting.
  • Metals trading.
• The company is refocusing on upstream operations and streamlining its smelting activities.

Investment Thesis

• 2014 and 2015 are expected to be challenging years for Chalco due to:
  • Weak aluminum prices.
  • Unstoppable capacity expansion.
  • Difficulty in cutting old capacity.
• The investment thesis is clear, and the market has already priced in the A-H spread.

Risk and Upside Factors

• Downside risks:
  • Fluctuations in aluminum prices.
  • Uncertainty in capacity controls.
  • Decline in raw material prices.
  • Uncertainty in overseas expansion.
• Upside risks:
  • Stronger-than-expected economic recovery.
  • Better production discipline.

Conclusion

The report concludes that while Chalco's share price has increased, it is not due to strong fundamentals, but rather momentum and sentiment. The Underperform rating is reconfirmed, and the price objective of HK$1.90 is based on a conservative P/B multiple. The A-H spread is unlikely to drive further price increases due to limited arbitrage opportunities and already priced-in sentiment.

Analysts

• Roy Zhang (Research Analyst, Merrill Lynch (Hong Kong)) – Email: roy.zhang@baml.com
• Bruce Wang (Research Analyst, Merrill Lynch (Hong Kong)) – Email: bruce.wang@baml.com

Important Disclosures

• The report contains investment opinions and ratings that are subject to disclosure requirements.
• The Investment Opinion System is detailed at the end of the report.
• The rating distribution for the Non-Ferrous Metals/Mining & Minerals Group and Global Group is provided, showing a majority of Underperform ratings.

iQmethodSM Measures Definitions

• Return On Capital Employed: NOPAT / (Total Assets – Current Liabilities + ST Debt + Accumulated Goodwill)
• Return On Equity: Net Income / Shareholders’ Equity
• Operating Margin: Operating Profit / Sales
• EBITDA Margin: EBITDA / Sales
• Cash Realization Ratio: Cash Flow from Operations / Net Income
• Asset Replacement Ratio: Capex / Depreciation
• Tax Rate: Tax Charge / Pre-Tax Income
• Net Debt-to-Equity Ratio: Net Debt / Total Equity
• Interest Cover: EBIT / Interest Expense
• Price / Book Value: Current Share Price / Shareholders’ Equity / Current Basic Shares

iQdatabase

• The iQdatabase is a real-time global research database that includes:
  • Forecasted and historical data.
  • Income statements, balance sheets, and cash flow statements for companies covered by BofA Merrill Lynch.